Farm Credit Administration - MARGIN AND CAPITAL ... Register... · Web viewOn or after March 1, 2017, all covered swap entities were required to comply with the variation margin requirements

Interagency Draft Version 4.6

Billing Codes: 4810-33-P, 6210-01-P, 6714-01-P, 8070-01-P, 6705-01-P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 45

Docket No. OCC-2019-[XXXX]

RIN: 1557-[XXXX]

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Part 237

Docket No. R-[XXXX]

RIN: 7100-[XXXX]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 349

RIN: 3064- AF00

FARM CREDIT ADMINISTRATION

12 CFR Part 624

RIN: 3052-[XXXX]

FEDERAL HOUSING FINANCE AGENCY

12 CFR Part 1221

RIN: 2590-AB02


MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); Board of

Governors of the Federal Reserve System (Board); Federal Deposit Insurance

Corporation (FDIC); Farm Credit Administration (FCA); and the Federal Housing

Finance Agency (FHFA).

ACTION: Interim final rule and request for comment.

SUMMARY: The OCC, Board, FDIC, FCA, and FHFA (each an Agency and,

collectively, the Agencies) are adopting and invite comment on an interim final rule

amending the Agencies’ regulations that require swap dealers and security-based swap

dealers under the Agencies’ respective jurisdictions to exchange margin with their

counterparties for swaps that are not centrally cleared (Swap Margin Rule). The Swap

Margin Rule takes effect under a phased compliance schedule stretching from 2016

through 2020, and the dealers covered by the rule continue to hold swaps in their

portfolios that were entered into before the effective dates of the rule. Those swaps are

grandfathered from the Swap Margin Rule’s requirements until they expire according to

their terms.

There are currently financial services firms located within the United Kingdom

(U.K.) that conduct swap dealing activities subject to the Swap Margin Rule. The U.K.

has provided formal notice of its intention to withdraw from the European Union (E.U.)

on March 29, 2019. If this transpires without a negotiated agreement between the U.K.

and E.U., these entities located in the U.K. may not be authorized to provide full-scope

financial services to swap counterparties located in the E.U.

The Agencies’ policy objective in developing the interim final rule is to address

one aspect of the scenario likely to ensue, whereby entities located in the U.K. might

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transfer their existing swap portfolios that face counterparties located in the E.U. over to

an affiliate or other related establishment located within the E.U. or the United States

(U.S.) The Agencies seek to address industry concerns about the status of grandfathered

swaps in this scenario, so the industry can focus on making preparations for swap

transfers. These transfers, if carried out in accordance with the conditions of the interim

final rule, will not trigger the application of the Swap Margin Rule to grandfathered

swaps that were entered into before the compliance dates of the Swap Margin Rule.

DATES: The interim final rule is effective [INSERT DATE OF PUBLICATION IN

FEDERAL REGISTER]. Comments should be received on or before [INSERT DATE

30 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER].

ADDRESSES: Interested parties are encouraged to submit written comments jointly to

all of the Agencies. Commenters are encouraged to use the title “Margin and Capital

Requirements for Covered Swap Entities” to facilitate the organization and distribution

of comments among the Agencies.

OCC: You may submit comments to the OCC by any of the methods set forth below.

Commenters are encouraged to submit comments through the Federal eRulemaking

Portal or e-mail, if possible. Please use the title “Margin and Capital Requirements for

Covered Swap Entities” to facilitate the organization and distribution of the comments.

You may submit comments by any of the following methods:

Federal eRulemaking Portal—“Regulations.gov”: Go to

www.regulations.gov. Enter “Docket ID OCC-2019-[XXXX]” in the Search Box and

click “Search.” Click on “Comment Now” to submit public comments.

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Click on the “Help” tab on the Regulations.gov home page to get

information on using Regulations.gov, including instructions for submitting public

comments.

E-mail: [email protected].

Mail: Legislative and Regulatory Activities Division, Office of the

Comptroller of the Currency, 400 7th Street, SW., suite 3E-218, Washington, DC 20219.

Hand Delivery/Courier: 400 7th Street, SW., suite 3E-218, Washington,

DC 20219.

Fax: (571) 465-4326.

Instructions: You must include “OCC” as the agency name and “Docket ID

OCC-2019-[XXXX]” in your comment. In general, the OCC will enter all comments

received into the docket and publish the comments on the Regulations.gov website

without change, including any business or personal information that you provide such as

name and address information, e-mail addresses, or phone numbers. Comments received,

including attachments and other supporting materials, are part of the public record and

subject to public disclosure. Do not include any information in your comment or

supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this

rulemaking action by any of the following methods:

Viewing Comments Electronically: Go to www.regulations.gov. Enter

“Docket ID OCC-2019-[XXXX]” in the Search box and click “Search.” Click on “Open

Docket Folder” on the right side of the screen. Comments and supporting materials can

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be viewed and filtered by clicking on “View all documents and comments in this docket”

and then using the filtering tools on the left side of the screen.

Click on the “Help” tab on the Regulations.gov home page to get

information on using Regulations.gov. The docket may be viewed after the close of the

comment period in the same manner as during the comment period.

Viewing Comments Personally: You may personally inspect comments at

the OCC, 400 7th Street, SW., Washington, DC 20219. For security reasons, the OCC

requires that visitors make an appointment to inspect comments. You may do so by

calling (202) 649-6700 or, for persons who are deaf or hearing impaired, TTY, (202)

649-5597. Upon arrival, visitors will be required to present valid government-issued

photo identification and submit to security screening in order to inspect comments.

Board: You may submit comments, identified by [Docket No. XXXX and RIN No.

XXXX], by any of the following methods:

Agency Web Site: http://www.federalreserve.gov. Follow the instructions for

submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

E-mail: [email protected]. Include the docket number and RIN

number in the subject line of the message.

Fax: (202) 452-3819 or (202) 452-3102.

Mail: Address to Ann E. Misback, Secretary, Board of Governors of the Federal

Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

All public comments are available from the Board’s website at

http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless

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modified for technical reasons or to remove personally identifiable information at the

commenter’s request. Accordingly, comments will not be edited to remove any

identifying or contact information. Public comments may also be viewed electronically

or in paper in Room 146, 1709 New York Avenue, NW, Washington, DC 20006 between

9:00 a.m. and 5:00 p.m. on weekdays.

FDIC: You may submit comments, identified by RIN 3064-AF00, by any of the

following methods:

Agency Website: https://www.FDIC.gov/regulations/laws/federal.

Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS,

Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC

20429.

Hand Delivered/Courier: The guard station at the rear of the 550 17th Street

Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.

E-mail: [email protected]. Comments submitted must include “FDIC” and

“RIN 3064-AF00 - Brexit Amendment: Margin and Capital Requirements for

Covered Swap Entities.” Comments received will be posted without change to

https://www.fdic.gov/regulations/laws/federal, including any personal information

provided.

FHFA: You may submit your written comments on the interim final rulemaking,

identified by regulatory information number: RIN 2590-AB02, by any of the following

methods:

Agency Website: www.fhfa.gov/open-for-comment-or-input.

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http://www.fhfa.gov/SupervisionRegulation/RegulationFederalRegister/Pages/Open-for-Comment.aspx

https://www.fdic.gov/regulations/laws/federal


Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments. If you submit your comment to the Federal

eRulemaking Portal, please also send it by e-mail to FHFA at

[email protected] to ensure timely receipt by the Agency. Please include

‘‘RIN 2590-AB02” in the subject line of the message.

Hand Delivery/Courier: The hand delivery address is: Alfred M. Pollard,

General Counsel, Attention: Comments/ RIN 2590-AB02, Federal Housing

Finance Agency, Constitution Center (OGC Eighth Floor), 400 7th St., SW,

Washington, DC 20219. Deliver the package to the Seventh Street entrance

Guard Desk, First Floor, on business days between 9:00 a.m. and 5:00 p.m.

U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service: The

mailing address for comments is: Alfred M. Pollard, General Counsel, Attention:

Comments/ RIN 2590-AB02, Federal Housing Finance Agency, Constitution

Center (OGC Eighth Floor), 400 7th St., SW, Washington, DC 20219.

All comments received by the deadline will be posted for public inspection without

change, including any personal information you provide, such as your name, address,

email address and telephone number on the FHFA website at http://www.fhfa.gov.

Copies of all comments timely received will be available for public inspection and

copying at the address above on government-business days between the hours of 10 a.m.

and 3 p.m. To make an appointment to inspect comments please call the Office of

General Counsel at (202) 649-3804.

FCA: We offer a variety of methods for you to submit your comments. For accuracy

and efficiency reasons, commenters are encouraged to submit comments by e-mail or

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through the FCA’s Web site. As facsimiles (fax) are difficult for us to process and

achieve compliance with section 508 of the Rehabilitation Act, we are no longer

accepting comments submitted by fax. Regardless of the method you use, please do not

submit your comments multiple times via different methods. You may submit comments

by any of the following methods:

E-mail: Send us an e-mail at [email protected].

FCA Web site: http://www.fca.gov. Click inside the “I want to…” field near the

top of the page; select “comment on a pending regulation” from the dropdown

menu; and click “Go.” This takes you to an electronic public comment form.

Federal eRulemaking Portal: http://www.regulations.gov. Follow the

instructions for submitting comments.

Mail: Barry F. Mardock, Deputy Director, Office of Regulatory Policy, Farm

Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.

You may review copies of all comments we receive at our office in McLean, Virginia or

on our Web site at http://www.fca.gov. Once you are on the Web site, click inside the “I

want to…” field near the top of the page; select “find comments on a pending regulation”

from the dropdown menu; and click “Go.” This will take you to the Comment Letters

page where you can select the regulation for which you would like to read the public

comments. We will show your comments as submitted, including any supporting data

provided, but for technical reasons we may omit items such as logos and special

characters. Identifying information that you provide, such as phone numbers and

addresses, will be publicly available. However, we will attempt to remove e-mail

addresses to help reduce Internet spam.

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mailto:[email protected]


FOR FURTHER INFORMATION CONTACT:

OCC: Chris McBride, Director for Market Risk, Treasury and Market Risk Policy, (202)

649-6402, or Allison Hester-Haddad, Counsel, Chief Counsel’s Office, (202) 649-5490,

for persons who are deaf or hearing impaired, TTY (202) 649-5597, Office of the

Comptroller of the Currency, 400 7th Street, SW, Washington, DC 20219.

Board: Constance Horsley, Deputy Associate Director, (202) 452-5239, Peter Clifford,

Manager, (202) 785-6057, Lesley Chao, Lead Financial Institution Policy Analyst, (202)

974-7063, or John Feid, Principal Economist, (202) 452-2385, Division of Supervision

and Regulation; Jason Shafer, Counsel, (202) 728-5811, or Justyna Bolter, Attorney,

(202) 452-2686, Legal Division, Board of Governors of the Federal Reserve System, 20th

and C Streets, NW, Washington, D.C. 20551.

FDIC: Irina Leonova, Senior Policy Analyst, [email protected], Capital Markets

Branch, Division of Risk Management Supervision, (202) 898-3843; Thomas F. Hearn,

Counsel, [email protected], Legal Division, Federal Deposit Insurance Corporation,

550 17th Street, NW, Washington, DC 20429.

FCA: Jeremy R. Edelstein, Associate Director, Finance & Capital Market Team,

Timothy T. Nerdahl, Senior Policy Analyst, Office of Regulatory Policy, (703) 883-4414,

TTY (703) 883-4056, or Richard A. Katz, Senior Counsel, Office of General Counsel,

(703) 883-4020, TTY (703) 883-4056, Farm Credit Administration, 1501 Farm Credit

Drive, McLean, VA 22102-5090.

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FHFA: Ron Sugarman, Principal Policy Analyst, Office of Policy Analysis and

Research, (202) 649-3208, [email protected], or James P. Jordan, Associate

General Counsel, Office of General Counsel, (202) 649-3075, [email protected],

Federal Housing Finance Agency, Constitution Center, 400 7th St., SW, Washington, DC

20024. The telephone number for the Telecommunications Device for the Hearing

Impaired is (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank

Act)1 required the Agencies to adopt rules jointly that establish capital and margin

requirements2 for swap entities3 that are prudentially regulated by one of the Agencies

(covered swap entities).4 These capital and margin requirements apply to swaps that are

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111–203, 124 Stat. 1376 (2010).2 See 7 U.S.C. 6s(e)(3)(A); 15 U.S.C. 78o-10(e)(3)(A).3 See 7 U.S.C. 6s; 15 U.S.C. 78o–10. Sections 731 and 764 of the Dodd-Frank Act added a new section 4s to the Commodity Exchange Act of 1936, as amended, and a new section, section 15F, to the Securities Exchange Act of 1934, as amended, respectively, which require registration with the Commodity Futures Trading Commission (CFTC) of swap dealers and major swap participants and the U.S. Securities and Exchange Commission (SEC) of security-based swap dealers and major security-based swap participants (each a swap entity and, collectively, swap entities).4 Section 1a(39) of the Commodity Exchange Act of 1936, as amended, defines the term “prudential regulator” for purposes of the margin requirements applicable to swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. The Board is the prudential regulator for any swap entity that is (i) a state-chartered bank that is a member of the Federal Reserve System, (ii) a state-chartered branch or agency of a foreign bank, (iii) a foreign bank which does not operate an insured branch, (iv) an organization operating under section 25A of the Federal Reserve Act of 1913, as amended, or having an agreement with the Board under section 25 of the Federal Reserve Act, or (v) a bank holding company, a foreign bank that is treated as a bank holding company under section 8(a) of the International Banking Act of 1978, as amended, or a savings and loan holding company (on or after the transfer date established under section 311 of the Dodd-Frank Act), or a subsidiary of such a company or foreign bank (other than a subsidiary for which the OCC or the FDIC is the prudential regulator

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not cleared by a registered derivatives clearing organization or a registered clearing

agency (non-cleared swaps). Swaps are certain types of financial derivatives, such as

interest rate swaps and commodity swaps, that the Dodd-Frank Act generally

characterized as “swaps.”5 On November 30, 2015, the Agencies published the Swap

Margin Rule to establish the minimum margin and capital requirements for the non-

cleared swap portfolios of covered swap entities.6

The Agencies are issuing this interim final rule in connection with efforts to assist

covered swap entities as they prepare for the event commonly described as “Brexit.” In

particular, this interim final rule is intended to address a covered swap entity’s ability to

service its cross-border clients in the event that the U.K. withdraws from the E.U. without

a Withdrawal Agreement.7 Briefly stated, the interim final rule amends the Swap Margin

or that is required to be registered with the CFTC or SEC as a swap dealer or major swap participant or a security-based swap dealer or major security-based swap participant, respectively). The OCC is the prudential regulator for any swap entity that is (i) a national bank, (ii) a federally chartered branch or agency of a foreign bank, or (iii) a Federal savings association. The FDIC is the prudential regulator for any swap entity that is (i) a State-chartered bank that is not a member of the Federal Reserve System, or (ii) a State savings association. The FCA is the prudential regulator for any swap entity that is an institution chartered under the Farm Credit Act of 1971, as amended. The FHFA is the prudential regulator for any swap entity that is a ‘‘regulated entity’’ under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (i.e., the Federal National Mortgage Association and its affiliates, the Federal Home Loan Mortgage Corporation and its affiliates, and the Federal Home Loan Banks). See 7 U.S.C. 1a(39).5 A “swap” is defined in section 721 of the Dodd-Frank Act to include, among other things, an interest rate swap, commodity swap, equity swap, and credit default swap, and a security-based swap is defined in section 761 of the Dodd-Frank Act to include a swap based on a single security or loan or on a narrow-based security index. See 7 U.S.C. 1a(47); 15 U.S.C. 78c(a)(68). For the remainder of this preamble, the term “non-cleared swaps” refers to non-cleared swaps and non-cleared security-based swaps unless the context requires otherwise. 6 80 FR 74840 (November 30, 2015). The Swap Margin Rule was amended to implement a statutory exemption for non-cleared swaps entered into for hedging by commercial end users and small financial institutions, see 80 FR 74916 (November 30, 2015), and to address treatment of qualified financial contracts, see 83 FR 50805 (October 10, 2018).7 See https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/759019/25_November_Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Co

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https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/759019/25_November_Agreement_on_the_withdrawal_of_the_United_Kingdom_of_Great_Britain_and_Northern_Ireland_from_the_European_Union_and_the_European_Atomic_Energy_Community.pdf




Rule to make it clear that in such an event, financial entities located in the U.K. may

transfer existing non-cleared swap portfolios over to a sister establishment of the U.K.

financial entity that is located in an E.U. Member State or the U.S., without concerns of

thereby triggering the application of the Swap Margin Rule’s margin requirements to

non-cleared swaps that had been grandfathered at the financial entity in the U.K.8 The

Agencies are also requesting public comment whether additional provisions or

clarifications are needed to achieve the Agencies’ objectives and provide greater clarity.

In issuing the Swap Margin Rule in 2015, the Agencies established an effective

date of April 1, 2016, with a phased in compliance schedule for the initial and variation

margin requirements.9 On or after March 1, 2017, all covered swap entities were required

to comply with the variation margin requirements for transactions with other swap

entities and financial end user counterparties. By September 1, 2020, all covered swap

entities will be required to comply with the initial margin requirements for non-cleared

swaps with all financial end users with a material swaps exposure and with all swap

entities.

mmunity.pdf (visited February 5, 2019).8 In this Supplementary Information, the Agencies’ references to an establishment of a financial entity is intended to be flexible as to whether the relationship of the financial entity to the business unit in the U.K. or elsewhere is due to an affiliation between separately-incorporated entities, branching of a single business entity in different jurisdictions, or some other form of business establishment through which an arm of the financial entity may be legally authorized to conduct business in that location.9 The applicable compliance date for a covered swap entity is based on the average daily aggregate notional amount of non-cleared swaps, foreign exchange forwards and foreign exchange swaps of the covered swap entity and its counterparty (accounting for their respective affiliates) for each business day in March, April and May of that year. The applicable compliance dates for initial margin requirements, and the corresponding average daily notional thresholds, are: September 1, 2016, $3 trillion; September 1, 2017, $2.25 trillion; September 1, 2018, $1.5 trillion; September 1, 2019, $0.75 trillion; and September 1, 2020, all swap entities and counterparties. See §__.1(e) of the Swap Margin Rule.

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The Swap Margin Rule’s requirements generally apply only to a non-

cleared swap entered into on or after the applicable compliance date.10 A non-cleared

swap entered into prior to an entity’s applicable compliance date is essentially

“grandfathered” by this regulatory provision, in that the non-cleared swap is generally not

subject to the margin requirements in the Swap Margin Rule (legacy swap). However,

the Agencies explained in the preamble of the Swap Margin Rule that a legacy swap that

is later amended or novated on or after the applicable compliance date should be subject

to the requirements of the Swap Margin Rule, in the interests of preventing evasion of the

rule’s margin requirements.11

The Swap Margin Rule has a broad territorial reach. It applies to swap dealers

and security-based swap dealers that are registered with the CFTC or the SEC,

respectively, and for which one of the Agencies is the prudential regulator, including, for

example, certain foreign banks and foreign banking organizations, certain entities

established abroad by U.S. banks, and certain foreign branches of U.S. banks. Typically,

such firms are registered in the foreign jurisdiction in which they are located with the

appropriate financial regulatory authorities, but the firms may also conduct swap

activities with counterparties that have significant ties to the U.S. (or the dealer itself may

be a branch of a U.S. bank) under circumstances that trigger dealer registration

obligations with the CFTC or SEC. The Agencies included an exemption from the

requirements of the Swap Margin Rule that applies whenever a foreign covered swap

entity engages in a foreign non-cleared swap, but the rule’s margin requirements still

10 See §__.1(e) of the Swap Margin Rule.11 80 FR 74850-51. See also, 83 FR 50805 (October 10, 2018) (the Agencies added paragraph (7) to §__.1(e), to clarify that a legacy swap would not lose its legacy status when the covered swap entity acceded to changes to the non-cleared swap as necessary to implement the QFC Receivership Stay regulations of the Board, the FDIC, and the OCC.)

13


apply when the counterparty has certain connections to the U.S., such as when the

counterparty is a foreign branch or office of an entity organized under U.S. federal or

state law.12

As a result, there are instances in which a covered swap entity engages in non-

cleared swap activities out of establishments in the U.K. that are subject to the

requirements of the Swap Margin Rule. The same is true in certain instances for a

covered swap entity engaging in those activities out of an establishment in another E.U.

Member State.

Financial entities, including covered swap entities, in the U.K. face uncertainty

about the applicable regulatory framework they will operate within after a U.K.

withdrawal from the E.U. In many instances, these firms made a strategic decision

decades ago to use a U.K. establishment as their base of operations to provide financial

services to customers across the E.U., consistent with the E.U.’s system of cross-border

authorizations to engage in regulated financial activities (known as “passporting”). These

firms have been mindful that one consequence of a U.K. exit from the E.U. absent a

Withdrawal Agreement will be an inability of the firms to continue providing investment

services in the E.U. under the current passporting regime. As a result, they might not be

in a position to perform certain operations in relation to derivatives contracts they

presently have with E.U. clients. In order to address this situation, these firms could

transfer their derivatives to a related establishment in an E.U. Member State, which in

turn would benefit from the passporting regime.

12 See §__.9(a)-(c) of the Swap Margin Rule.

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In addition, a covered swap entity that operates an establishment located outside

the U.K. may be affected if the U.K. exits the E.U. without a Withdrawal Agreement.

These covered swap entities may have entered into non-cleared swaps with financial

entities located in the U.K. These U.K. counterparties of the covered swap entity may

need to relocate certain operations, in order to continue providing financial services to

their own customers in the E.U. Accordingly, a covered swap entity’s counterparties

with establishments in the U.K. may seek to transfer their non-cleared swaps to related

establishments of their own in an E.U. Member State.13

In recent months, some financial entities have initiated processes under which a

U.K. court sanctions a bulk transfer of their business, including derivatives, from the

balance sheets of their U.K. establishments to a different location established by the

dealer in another E.U. Member State.14 For many months before that, industry

stakeholders urged E.U. regulators to provide certainty that these kinds of portfolio

13 See §__.9(a)-(c) of the As discussed later in this Supplementary Information, the Agencies have designed the interim final rule to recognize the need for flexibility on the part of financial entities as they attempt to work through the unanticipated effects of a U.K. exit from the E.U. absent a Withdrawal Agreement. For example, while this discussion illustrates an E.U. establishment of a covered swap entity taking on the swap portfolios of the entity’s related covered swap entity in the U.K., a different financial entity’s current structure might mean the U.K. portfolio is currently held by the financial entity’s CFTC-registered non-bank subsidiary in the U.K., which is subject to the CFTC’s non-cleared swap margin rule. As a general matter, the CFTC’s rule and the Agencies’ Swap Margin Rule impose the same requirements and feature the same grandfathering. But the portfolio transfer over to the financial entity’s covered swap entity in the E.U. will, as a legal matter, subject them to the Agencies’ swap margin rule once they are transferred. Or some financial firms that operate a covered swap entity through an establishment in the U.S. may make strategic decisions to refrain from opening a new E.U. establishment post-withdrawal, and thus need to pull their U.K. non-cleared swap portfolios back to their U.S. covered swap entity.14 See, e.g., Barclays Bank plc Part VII Business transfer to Barclays Bank Ireland plc (2019) EWHC 129 (Ch), at http://www.bailii.org/ew/cases/EWHC/Ch/2019/129.pdf (visited January 29, 2019); “Two Banks Begin Moving Swaps out of London, Pre-Brexit,” Risk.net (November 30, 2018), at https://www.risk.net/derivatives/6168671/banks-begin-moving-swaps-out-of-london-pre-brexit (visited January 25, 2019); “UBS Wins Approval for €32bn Brexit Swaps Transfer,” Risk.net (February 6, 2019), at https://www.risk.net/derivatives/6367306/ubs-wins-approval-for-eu32bn-brexit-swaps-transfer.

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https://www.risk.net/derivatives/6367306/ubs-wins-approval-for-eu32bn-brexit-swaps-transfer

https://www.risk.net/derivatives/6367306/ubs-wins-approval-for-eu32bn-brexit-swaps-transfer

https://www.risk.net/derivatives/6168671/banks-begin-moving-swaps-out-of-london-pre-brexit

https://www.risk.net/derivatives/6168671/banks-begin-moving-swaps-out-of-london-pre-brexit


transfers of swaps, entered into before the E.U.’s swap margin rule, will not become

subject to E.U. swap margin rules by virtue of the legal changes associated with

novations or other legal transfer methods. The European Supervisory Authorities

(ESAs)15 published a final report in November to make a limited exemption in the

Commission Delegated Regulation under the European Market Infrastructure Regulation

(EMIR) for bilateral margining requirements. The exemption would facilitate novations

of these non-cleared swaps by ensuring that the regulatory characteristics of the original

contracts are preserved.16

The scheduled date of the U.K. withdrawal is March 29, 2019. The Agencies

believe it is appropriate to provide clarity, in order to facilitate the work of covered swap

entities and their counterparties to transfer non-cleared swaps in response to a U.K. exit

from the E.U. absent a Withdrawal Agreement, without thereby converting their legacy

swaps into covered swaps subject to the Swap Margin Rule. The conditions of eligibility

for the transfers are described in the next section of this SUPPLEMENTARY

INFORMATION.

II. Description of the Interim Final Rule.

As discussed above, legacy swaps are generally grandfathered from the Swap

Margin Rule’s requirements. More specifically, §__.1(e) states that covered swap entities

shall comply with the Swap Margin Rule’s minimum margin requirements for non-

15 The three ESAs are the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA). 16 ESAs Propose to Amend Bilateral Margin Requirements to Assist Brexit Preparations for OTC Derivative Contracts (November 29, 2018), at https://www.esma.europa.eu/press-news/esma-news/esas-propose-amend-bilateral-margin-requirements-assist-brexit-preparations-otc (visited January 25, 2019).

16

https://www.esma.europa.eu/press-news/esma-news/esas-propose-amend-bilateral-margin-requirements-assist-brexit-preparations-otc

https://www.esma.europa.eu/press-news/esma-news/esas-propose-amend-bilateral-margin-requirements-assist-brexit-preparations-otc


cleared swaps entered into on or after the compliance date that the rule establishes for

separate classes of counterparties, depending on the size of their swaps portfolios.17

However, in the preamble to the Swap Margin Rule, in response to comments, the

Agencies declined to include regulatory language that would extend legacy swap

treatment to a swap if it is subsequently novated or amended after the applicable

compliance date, expressing concerns about evasion and implementation.18

In the interim final rule, the Agencies are amending §__.1 to add an additional

provision, paragraph §__.1(h). This new provision is designed to preserve the status quo

for legacy swaps for a covered swap entity in the event of a “no-deal” U.K. withdrawal,

regardless of whether that covered swap entity is the swap counterparty directly involved

in the transfer out of the U.K. or the counterparty on the other side of the swap.

A covered swap entity may, for example, use its establishment in the E.U. to take

on non-cleared swap portfolios from its swap dealing affiliate in the U.K. In a different

case, the covered swap entity’s establishments in the E.U. and the U.K. may both be

branches of the same swap dealing bank. Alternatively, there may be yet a different

relationship due to the structure of the specific financial entity involved.

17 A legacy swap may still be subjected to margin requirements if the covered swap entity places the swap into a netting set that includes other non-cleared swaps that are entered into after the compliance date applicable to the covered swap entity. Swap Margin Rule §.__5(a)(3). Covered swap entities use netting sets to calculate their margin requirements for multiple swaps with a single counterparty on a portfolio basis, offsetting asset and liability exposures in the portfolio to one net exposure, subject to conditions contained in the Swap Margin Rule, including an enforceable legal netting agreement with the counterparty. See §__.5(a).18 80 FR 74850-51. The Agencies articulated concerns about the potential evasion of the Swap Margin Rule if legacy swaps could be materially amended and not become subject to the requirements of the Swap Margin Rule, as well as the Agencies’ concerns about the difficulty of administrating a more complex regulatory approach that attempted to draw distinctions among the materiality of, or the intended purpose of, amendments to legacy swaps.

17


On the other hand, the covered swap entity may not move its operations in any

way, but it may have existing portfolios of non-cleared swaps facing counterparties who

are themselves relocating out of the U.K., to an affiliate, or a branch, or some other type

of establishment outside of the U.K.

To be effective, the Agencies believe this interim final rule must cover the

different scenarios that would trigger the need for a covered swap entity to participate in

amending a non-cleared swap in order to “relocate” the swap, either on account of its

own need to move non-cleared swaps out of the U.K., or its counterparty’s need to do

so.19

Accordingly, the text of the interim final rule is intended to be flexible as to the

nature of the financial entity’s establishment – covered swap entity or counterparty –

maintained in the U.K., be it an entity organized under U.K. law, or a branch or other

authorized office maintained in the U.K. by a firm that is legally organized elsewhere.

This flexibility extends to the establishment to which the non-cleared swaps are

transferred, so long as the transferring establishment in the U.K. is related to the

receiving establishment outside the U.K.20 The interim final rule is also intended to be

flexible as to the manner in which that establishment in the U.K held its non-cleared

swaps, either because the financial entity booked the swap at the U.K. establishment, or

19 The Agencies note that, regardless whether the covered swap entity is driving the swap relocation, or the covered swap entity’s counterparty is driving the move, the covered swap entity will need to participate in whatever amendments or other legal steps are used to reflect the transfer of a bilateral non-cleared swap contract.20 See §__.1(h)(2)(ii), referring to non-cleared swaps an entity in the U.K. arranges to amend in order to transfer it to one of its affiliates, or a branch or other authorized form of establishment, located in an E.U. Member State.

18


as determined by other business or account criteria the financial entity consistently

employs in assigning a particular non-cleared swap to a particular establishment. 21

To benefit from the treatment of this new legacy swap provision, the financial

entity located in the U.K. must arrange to make the amendments to the non-cleared swap

solely for the purpose of transferring the non-cleared swap to an affiliate or other related

establishment that is located in an E.U. Member State (once the U.K. has withdrawn from

the E.U., as further discussed below). This purpose test also contains a requirement that

the transfer be made in connection with the U.K. entity’s planning for the possibility that

the U.K. might exit the E.U. without a Withdrawal Agreement, or the U.K. entity’s

response to such event.22

The interim final rule is intended to be flexible as to whether the relationship

aspect of the purpose test is due to affiliation between separately-incorporated entities,

branching of a single business entity in different jurisdictions, or some other form of

business establishment through which an arm of the financial entity may be legally

authorized to conduct business in the E.U. Member State. The Agencies have similarly

included transfers to an affiliate, or branch or other authorized form of establishment, that

the financial entity maintains in the U.S. to provide additional flexibility for financial

entities with U.S. headquarters or other U.S. establishments.

21 See §__.1(h)(2)(i), referring to non-cleared swap originally entered into before the relevant compliance date under the Swap Margin Rule, when one party to the swap booked it at, or otherwise held it at, an entity (including a branch or other authorized form of establishment) located in the U. K.22 See §__.1(h)(2)(ii), requiring the amendments to be for the sole purpose of transferring the non-cleared it to one of its affiliates, or a branch or other authorized form of establishment, located in an E.U. Member State, in connection with the entity’s planning for or response to U.K. withdrawal.

19


For compliance purposes, the interim final rule makes one distinction between a

transfer initiated by the financial entity standing as the covered swap entity at the

completion of the transaction, versus a transfer initiated by the covered swap entity’s

counterparty. For the latter, the counterparty must make a representation to the covered

swap entity that the counterparty carried out the swap in accordance with both elements

of the purpose test.

The interim final rule is designed to permit such amendments as financial entities

find necessary to relocate non-cleared swap portfolios out of the U.K. under the purpose

test. These changes may be carried out using any of the methods typically employed for

effecting non-cleared swap transfers, including industry protocols, contractual

amendments, or contractual tear-up and replacement. To the extent they would otherwise

trigger margin requirements, judicially-supervised changes that result in a non-cleared

swap being booked at or held by a related establishment in the E.U., including by means

of the court-sanctioned process available under Part VII of the U.K.’s Financial Services

and Markets Act of 2000, are similarly within the scope of the interim final rule.

However, the Agencies do not believe the relief being provided for relocation

purposes should be expansively applied to encompass economic changes to a legacy

swap. Accordingly, the rule text makes legacy swap status unavailable if the

amendments to a non-cleared swap modify the payment amount calculation methods, the

maturity date, or the notional amount of the non-cleared swap. Thus, for example, if the

day count convention of a non-cleared swap changes as a consequence of re-locating a

non-cleared interest rate swap several time zones away from the U.K., the parties to the

swap would not be changing the payment amount calculation methods. On the other

20


hand, a change to one of the payment amount calculation economic factors (e.g., an

interest rate margin or base rate) would be a change outside the scope of the interim final

rule and would trigger application of the margin requirements.

The Agencies also seek to establish a reasonable period of time for the necessary

work to achieve the transfers to be performed. The interim final rule permits transfers for

a period of one year after a U.K. withdrawal. The 1-year period commences at the point

at which the law of the European Union ceases to apply in the U.K. pursuant to Article

50(3) of the Treaty on European Union, without conclusion of a Withdrawal Agreement

between the U.K. and E.U. pursuant to Article 50(2).23 If the present withdrawal date is

extended, and withdrawal later occurs at the end of that extension without a Withdrawal

Agreement, the interim final rule’s 1-year period would begin at that time. The Agencies

contemplate that, if the withdrawal date is extended, financial entities may negotiate and

document their desired transfers during the intervening period, under terms that delay

consummation of any transfer until withdrawal takes place without an agreement and the

interim final rule’s substantive provisions are thereby triggered.

The Agencies believe that a provision enabling entities to transfer non-cleared

swaps while retaining legacy status would be most effective if the timeframe allowed

takes into account the timeframe under corresponding E.U. legislation. As noted above,

the ESAs have submitted novation amendments for their margin rules in proposed form

to the European Commission, but the relief that would be afforded thereby has not yet

23 For an overview of the process by which an E.U. Member State may withdraw from the E.U., see the European Parliament Briefing, Article 50 TEU: Withdrawal of a Member State from the E.U. (February 2016), available at http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI(2016)577971_EN.pdf (visited January 25th, 2019).

21

http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI(2016)577971_EN.pdf

http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/577971/EPRS_BRI(2016)577971_EN.pdf


been finalized under the E.U. process.24 The ESAs’ draft Regulatory Technical Standards

provides relief for one year after the amendments are finalized by official publication,

after parliamentary approval. If the E.U. amendments are not yet finalized at the time of

a U.K. withdrawal, affected financial entities may delay consummation of their non-

cleared swap transfers until the ESAs’ proposed amendments apply. The Agencies

anticipate some transferring financial entities will operate under both sets of regulations

and will accordingly seek to coordinate their transfer operations for compliance purposes

under both sets of amendments. To facilitate this, the Agencies’ interim final rule has a

“tacking” provision that will extend the Agencies’ 1-year period by the amount of any

additional time available under the ESAs’ 1-year period.

The interim final rule differs from the ESAs’ proposed amendments to the extent

that the legacy status protection afforded under the ESAs’ approach is unavailable to

derivatives entered into after the official, final publication of the amendments (which

establishes the legal effective date of the rule). The Agencies have provided legacy status

protection to any swap entered into before the applicable compliance date – of which

there are two still upcoming, on September 1, 2019 and September 1, 2020 – with no

cutoff for swaps executed before those dates but after issuance of this interim final rule.

The Agencies believe the marginal volume of additional legacy swaps that will be

protected by the Agencies’ approach is not likely to be substantial, and the additional

time granted could facilitate a more organized transition for the affected counterparties.

24 See Final Report on EMIR RTS on the novation of bilateral contracts not subject to bilateral margins, ESAs 2018 25 (November 27, 2018), at https://eiopa.europa.eu/Publications/Reports/ESAs%202018%2025%20-%20Final%20Report%20-%20Bilateral%20margining%20%28novation%29.pdf (visited January 25, 2019).

22

https://eiopa.europa.eu/Publications/Reports/ESAs%202018%2025%20-%20Final%20Report%20-%20Bilateral%20margining%20(novation).pdf

https://eiopa.europa.eu/Publications/Reports/ESAs%202018%2025%20-%20Final%20Report%20-%20Bilateral%20margining%20(novation).pdf


III. Request for Comments.

The Agencies request comment on all aspects of the interim final rule as well as

on the following specific questions.

(1) The interim final rule permits amendments to non-cleared swaps in order to transfer

swaps in response to the scenario in which the U.K. exits the E.U. in the absence of a

Withdrawal Agreement. As explained above, the Agencies seek to encompass changes

through a variety of methods, including industry protocols, contractual amendments,

transfers permitted by judicial proceedings, and contractual tear-up and replacement.

What, if any, additional clarification in the rule as to types of permissible amendments

should the Agencies provide? What specifically should be added or clarified, and why is

it necessary in order to achieve the Agencies’ policy objectives in the context of a U.K.

withdrawal from the E.U.?

(2) The relief provided by the interim final rule applies to the transfer of swaps from a

financial entity’s establishment in the U.K. to an establishment in the E.U. or the U.S.

What, if any, other types of relief should be considered for swaps that are transferred

from the E.U. to the U.K.? Please provide a description of the circumstances creating

this need, including the frequency of its occurrence.

(3) The transfers that are accommodated by the interim final rule are available only

between affiliates or other related establishments. The Agencies do not intend the relief

provided by the interim final rule to provide an opportunity for financial entities to seek

out a new dealer relationship and retain legacy swap treatment. However, the Agencies

request comment on whether there may be financial entities that are unable to arrange a

23


transfer of legacy swaps unless the transfer is to an unrelated entity outside the U.K. and

are thus not covered under the terms of the interim final rule. Commenters should

provide descriptions of the factual circumstances, including the frequency of its

occurrence.

24


IV. Administrative Law Matters.

A. Administrative Procedure Act.

The Agencies are issuing the interim final rule without prior notice and the

opportunity for public comment and without the 30-day delayed effective date ordinarily

prescribed by the Administrative Procedure Act (APA).25 Pursuant to section 553(b)(B)

of the APA, general notice and the opportunity for public comment are not required with

respect to a rulemaking when an “agency for good cause finds (and incorporates the

finding and a brief statement of reasons therefor in the rules issued) that notice and public

procedure thereon are impracticable, unnecessary, or contrary to the public interest.”26

As discussed above, the interim final rule addresses a potential impact of the

scenario in which the U.K. exits from the E.U. in the absence of a Withdrawal

Agreement. The U.K.’s exit is expected to occur on March 29, 2019. The interim final

rule facilitates the ability of a financial entity with non-cleared swaps located in the U.K.

to relocate existing swap portfolios over to affiliates or other related entities located

within the E.U. or U.S., without the “grandfathered” legacy swaps in the portfolios

becoming subject to the Swap Margin Rule. As such, the interim final rule benefits

covered swap entities subject to the Swap Margin Rule by removing an impediment to

the transfers and maintaining the status quo of a legacy swap. The interim final rule does

not impose any requirements or mandatory burden on any covered swap entity.

The Agencies believe that the public interest is best served by making the interim

final rule effective as soon as possible as a result of the expected timing of events in the

U.K. The Agencies believe that issuing the interim final rule will provide the certainty

25 5 U.S.C. 553.26 5 U.S.C. 553(b)(B).

25


necessary to facilitate the industry’s efforts to begin arranging their transfers immediately

upon the U.K.’s withdrawal. In addition, the Agencies believe that providing a notice

and comment period prior to issuance of the interim final rule is impracticable given the

need for relief to begin on March 29, 2019. For these reasons, the Agencies find there is

good cause consistent with the public interest to issue the interim final rule without

advance notice and comment.27

The APA also requires a 30-day delayed effective date, except for (1) substantive

rules which grant or recognize an exemption or relieve a restriction; (2) interpretative

rules and statements of policy; or (3) as otherwise provided by the agency for good

cause.28 The Agencies find good cause to publish the interim final rule with an immediate

effective date for the same reasons set forth above under the discussion of section 553(b)

(B) of the APA.

While the Agencies believe there is good cause to issue the interim final rule

without advance notice and comment and with an immediate effective date, the Agencies

are requesting comment on all aspects of the interim final rule.

B. Solicitation of Comments on Use of Plain Language.

Section 722 of the Gramm-Leach-Bliley Act, Pub. L. 106-102, sec. 722, 113 Stat.

1338, 1471 (Nov. 12, 1999), requires the OCC, Board and FDIC to use plain language in

all proposed and final rules published after January 1, 2000. The OCC, Board and FDIC

invite your comments on how to make this proposal easier to understand. For example:

Have we organized the material to suit your needs? If not, how could this

material be better organized?

27 5 U.S.C. 553(b)(B); 553(d)(3). 28 5 U.S.C. 553(d).

26


Are the requirements in the regulation clearly stated? If not, how could the

regulation be more clearly stated?

Does the regulation contain language or jargon that is not clear? If so, which

language requires clarification?

Would a different format (grouping and order of sections, use of headings,

paragraphing) make the regulation easier to understand? If so, what changes to

the format would make the regulation easier to understand?

What else could we do to make the regulation easier to understand?

C. Paperwork Reduction Act Analysis.

In accordance with the requirements of the Paperwork Reduction Act of 1995

(PRA), 44 U.S.C. 3501-3521, the Agencies may not conduct or sponsor, and a respondent

is not required to respond to, an information collection unless it displays a currently-valid

Office of Management and Budget (OMB) control number. The OCC, Board, and FDIC

have reviewed this interim final rule and determined that it introduces a new collection of

information pursuant to the PRA and the OCC and FDIC have submitted it to OMB for

review under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the

OMB’s implementing regulations (5 CFR 1320). The Board has reviewed the

information collection under its delegated authority. The OMB Control Numbers are:

1557-0251 (OCC), 3064-0204 (FDIC), and 7100-0364 (Board).29 The FCA has

determined the rule will not introduce any collection of information for Farm Credit

System institutions because Farm Credit System institutions are Federally chartered

instrumentalities of the United States and instrumentalities of the United States are

specifically excepted from the definition of “collection of information” contained in 44

29 The agencies may be required to request new control numbers.

27


U.S.C. 3502(3). The FHFA has determined that the interim final rule does not contain

any collection of information for which the agency must obtain clearance under the PRA.

Section __.1(h) specifies that transfers of legacy swaps initiated by a covered

swap entity’s counterparty require a representation to the covered swap entity that the

counterparty carried out the swap in accordance with both elements of the purpose test30

in order to remain outside the scope of the rule. The agencies estimate that the burden for

this representation is de minimis. Therefore, they are estimating minimal burden for this

requirement.

OCC:

Estimated Number of Respondents: 10.

Estimated Burden per Response: 1 hour.

Total Estimated Burden: 10 hour.

FRB:

Estimated Number of Respondents: 41.


Total Estimated Burden: 41 hours.

FDIC:

30 The purpose test requires that the financial entity located in the U.K. arrange to make the amendments to the non-cleared swap solely for the purpose of transferring the non-cleared swap to an affiliate or other related establishment that is located in an E.U. Member State. This purpose test also contains a requirement that the transfer be made in connection with the U.K. entity’s planning for the possibility that the U.K. might exit the E.U. without a Withdrawal Agreement, or the U.K. entity’s response to such an event.

28


Estimated Number of Respondents: 1.31


Total Estimated Burden: 1 hour.

Comments are invited on:

a. Whether the collections of information are necessary for the proper

performance of the agencies’ functions, including whether the information has practical

utility;

b. The accuracy or the estimate of the burden of the information collections,

including the validity of the methodology and assumptions used;

c. Ways to enhance the quality, utility, and clarity of the information to be

collected;

d. Ways to minimize the burden of the information collections on respondents,

including through the use of automated collection techniques or other forms of

information technology; and

e. Estimates of capital or startup costs and costs of operation, maintenance, and

purchase of services to provide information.

All comments will become a matter of public record. Comments on aspects of

this notice that may affect reporting, recordkeeping, or disclosure requirements and

burden estimates should be sent to the addresses listed in the ADDRESSES section of

this document. A copy of the comments may also be submitted to the OMB desk officer

by mail to U.S. Office of Management and Budget, 725 17th Street NW, #10235,

31 The FDIC’s estimates zero entities, but is estimating one here as a placeholder.

29


Washington, DC 20503; facsimile to (202) 395-6974; or e-mail to

[email protected], Attention, Federal Banking Agency Desk Officer.

D. Regulatory Flexibility Act Analysis.

OCC: The Regulatory Flexibility Act (RFA) does not apply to a rulemaking when a

general notice of proposed rulemaking is not required. 5 U.S.C. 603 and 604. As noted

previously, the Agencies have determined for good cause that it is impracticable and

contrary to the public interest to publish a general notice of proposed rulemaking for this

joint final rule. Accordingly, the RFA’s requirements relating to an initial and final

regulatory flexibility analysis do not apply.

Board: The Regulatory Flexibility Act (RFA) requires an agency to consider whether the

rules it proposes will have a significant economic impact on a substantial number of

small entities. The RFA applies only to rules for which an agency publishes a general

notice of proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed previously,

consistent with section 553(b)(B) of the APA, the Board has determined for good cause

that general notice and opportunity for public comment is impracticable and contrary to

the public’s interest, and therefore the Board is not issuing a notice of proposed

rulemaking. Accordingly, the Board has concluded that the RFA’s requirements relating

to initial and final regulatory flexibility analysis do not apply. Further, the Board notes

that no small entities, as defined by the Small Business Administration’s rules

implementing the RFA, will be affected by the interim final rule.

FDIC: The Regulatory Flexibility Act (RFA)32 requires an agency to consider whether

the rules it proposes will have a significant economic impact on a substantial number of

32 5 U.S.C. 601 et seq.

30


small entities.33 The RFA applies only to rules for which an agency publishes a general

notice of proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed in the joint

interim final rule, consistent with section 553(b)(B) of the APA, the FDIC determined for

good cause that general notice and opportunity for public comment was unnecessary, and

therefore the FDIC did not issue a notice of proposed rulemaking. Accordingly, the FDIC

has concluded that the RFA’s requirements relating to initial and final regulatory

flexibility analysis do not apply. Further, the FDIC supervises 3,533 depository

institutions,34 of which 2,726 are defined as small banking entities by the terms of the

RFA.35 This interim final rule directly applies to covered swap entities (which includes

persons registered with the CFTC as swap dealers or major swap participants pursuant to

the Commodity Exchange Act of 1936 and persons registered with the SEC as security-

based swap dealers and major security-based swap participants under the Securities

Exchange Act of 1934) that are subject to the requirements of the Swap Margin Rule. The

FDIC has identified 104 swap dealers that, as of February 12, 2019, have registered as

swap entities. 36 None of these institutions are supervised by the FDIC. Therefore, no

33 The SBA defines a small banking organization as having $550 million or less in assets, where “a financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.” 13 CFR 121.201 n.8 (2018). “SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates. . . .” 13 CFR 121.103(a)(6) (2018). Following these regulations, the FDIC uses a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the covered entity is “small” for the purposes of RFA.

34 FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2).

35 FDIC Call Report, September 30, 2018.

36 In identifying the 104 entities referred to in the text, the Agencies used the list of swap dealers set forth, on February 12, 2019 (providing data as of February 12, 2019) at https://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.html. While the CFTC has adopted a registration requirement for entities that meet the definition of major swap participants, as of February 12, 2019, the CFTC’s website does not indicate that any entities are currently registered as major swap participants. Major swap participants are required to apply for registration through a filing with the National Futures Association. Accordingly, the Agencies reviewed the National Futures Association https://www.nfa.futures.org/members/sd/index.html to determine whether there were registered major swap

31


small FDIC-supervised entities, as defined by the Small Business Administration’s rules

implementing the RFA, will be affected by the interim final rule.

FCA: Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.),

the FCA hereby certifies that the interim final rule will not have a significant economic

impact on a substantial number of small entities. Each of the banks in the Farm Credit

System, considered together with its affiliated associations, has assets and annual income

more than the amounts that would qualify them as small entities. Nor does the Federal

Agricultural Mortgage Corporation meet the definition of a “small entity.” Therefore,

Farm Credit System institutions are not “small entities” as defined in the Regulatory

Flexibility Act.

FHFA: The RFA applies only to rules for which an agency is required to publish a

general notice of proposed rulemaking pursuant to 5 U.S.C. 553(b). As discussed in the

joint interim final rule, consistent with section 553(b)(B) of the APA, FHFA determined

for good cause that general notice and opportunity for public comment was impracticable

and contrary to the public interest, and therefore FHFA did not issue a notice of proposed

rulemaking. Accordingly, FHFA has concluded that the RFA’s requirements relating to

initial and final regulatory flexibility analysis do not apply. This interim final rule

directly applies to covered swap entities (which includes persons registered with the

CFTC as swap dealers or major swap participants pursuant to the Commodity Exchange

Act of 1936 and persons registered with the SEC as security-based swap dealers and

major security-based swap participants under the Securities Exchange Act of 1934) that

participants. As of February 11, 2019, there were no Major Swaps Participants listed on this link. The SEC has not yet imposed a registration requirement for security-based swap dealers or major security-based swap participants.

32


are subject to the requirements of the Swap Margin Rule. No FHFA-regulated entity is a

covered swap entity, nor is any FHFA-regulated entity a small entity, as defined by the

Small Business Administration’s rules implementing the RFA. Therefore, no small

FHFA-regulated entity will be affected by the interim final rule.

E. Unfunded Mandates Reform Act of 1995.

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded Mandates

Act), 2 U.S.C. 1532, requires the OCC to prepare a budgetary impact statement before

promulgating any final rule for which a general notice of proposed rulemaking was

published. As discussed above, the OCC has determined for good cause that the

publication of a general notice of proposed rulemaking is impracticable and contrary to

the public interest. Accordingly, this joint final rule is not subject to section 202 of the

Unfunded Mandates Act.

F. Riegle Community Development and Regulatory Improvement Act of 1994.

The Riegle Community Development and Regulatory Improvement Act of 1994

(RCDRIA) requires that each Federal banking agency, in determining the effective date

and administrative compliance requirements for new regulations that impose additional

reporting, disclosure, or other requirements on insured depository institutions, consider,

consistent with principles of safety and soundness and the public interest, any

administrative burdens that such regulations would place on depository institutions,

including small depository institutions, and customers of depository institutions, as well

as the benefits of such regulations. In addition, new regulations and amendments to

regulations that impose additional reporting, disclosures, or other new requirements on

33


insured depository institutions generally must take effect on the first day of a calendar

quarter that begins on or after the date on which the regulations are published in final

form.37 Each Federal banking agency has determined that the final rule would not impose

additional reporting, disclosure, or other requirements; therefore the requirements of the

RCDRIA do not apply.

List of Subjects

12 CFR Part 45

Administrative practice and procedure, Capital, Margin requirements, National Banks,

Federal Savings Associations, Reporting and recordkeeping requirements, Risk.

12 CFR Part 237

Administrative practice and procedure, Banks, banking, Foreign banking, Holding

companies, Reporting and recordkeeping requirements, Swaps.

12 CFR Part 349

Administrative practice and procedure, Banks, Holding companies, Capital, Margin

Requirements, Reporting and recordkeeping requirements, Savings associations, Risk,

Swaps.

12 CFR Part 624:

Accounting, Agriculture, Banks, Banking, Capital, Cooperatives, Credit, Margin

requirements, Reporting and recordkeeping requirements, Risk, Rural areas, Swaps.

12 CFR Part 122137 12 U.S.C. 4802.

34


Government-sponsored enterprises, Mortgages, Securities.

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons set forth in the common preamble and under the authority of 12

U.S.C. 93a and 5412(b)(2)(B), the Office of the Comptroller of the Currency amends

chapter I of Title 12, Code of Federal Regulations, as follows:

PART 45—MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP

ENTITIES

1. The authority citation for Part 45 continues to read as follows:

Authority: 7 U.S.C. 6s(e), 12 U.S.C. 1 et seq., 12 U.S.C. 93a, 161, 481, 1818,

3907, 3909, 5412(b)(2)(B), and 15 U.S.C. 78o-10(e).

2. Section 45.1 is amended by adding a new paragraph (h) to read as follows:

§ 45.1 Authority, purpose, scope, exemptions and compliance dates.

* * * * *

(h) Legacy swaps. Covered swaps entities are required to comply with the

requirements of this part for non-cleared swaps and non-cleared security-based swaps

entered into on or after the relevant compliance dates for variation margin and for initial

margin established in paragraph (e) of this section. Any non-cleared swap or non-cleared

35


security-based swap entered into before such relevant date shall remain outside the scope

of this part if changes are made to it as follows:

(1) [RESERVED]

(2) The non-cleared swap or non-cleared security based swap was amended under

the following conditions:

(i) The swap was originally entered into before the relevant compliance date

established in paragraph (e) of this section and one party to the swap booked it at, or

otherwise held it at, an entity (including a branch or other authorized form of

establishment) located in the United Kingdom;

(ii) The entity in the United Kingdom subsequently arranged to amend the swap,

solely for the purpose of transferring it to an affiliate, or a branch or other authorized

form of establishment, located in any European Union member state or the United States,

in connection with the entity’s planning for or response to the event described in

paragraph (h)(2)(iii), and the transferee is:

(A) A covered swap entity, or

(B) A covered swap entity’s counterparty to the swap, and the counterparty

represents to the covered swap entity that the counterparty performed the transfer in

compliance with the requirements of paragraph (h)(2)(i)-(ii);

(iii) The law of the European Union ceases to apply to the United Kingdom

pursuant to Article 50(3) of the Treaty on European Union, without conclusion of a

Withdrawal Agreement between the United Kingdom and the European Union pursuant

to Article 50(2);

36


(iv) The amendments do not modify any of the following: the payment amount

calculation methods, the maturity date, or the notional amount of the swap;

(v) The amendments cause the transfer to take effect on or after the date of the

event described in paragraph (h)(2)(iii) transpires; and

(iv) The amendments cause the transfer to take effect by the later of:

(A) The date that is one year after the date of the event described in paragraph (h)

(2)(iii); or

(B) Such other date permitted by transitional provisions under Article 35 of

Commission Delegated Regulation (E.U.) No. 2016/2251, as amended.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

12 CFR Chapter II


For the reasons set forth in the preamble, the Board of Governors of the Federal

Reserve System amends 12 CFR part 237 to read as follows:

PART 237—SWAPS MARGIN AND SWAPS PUSH-OUT

3. The authority citation for part 237 continues to read as follows:

Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o–10(e), 15 U.S.C. 8305, 12 U.S.C. 221

et seq., 12 U.S.C. 343–350, 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., 12 U.S.C. 3101 et

seq., and 12 U.S.C. 1461 et seq.


Subpart A— Margin and Capital Requirements for Covered Swap Entities (Regulation

KK)

§237.1 Authority, purpose, scope, exemptions and compliance dates. (AMENDED)

37


* * * * *


requirements of this subpart for non-cleared swaps and non-cleared security-based swaps




of this subpart if changes are made to it as follows:

(1) [RESERVED]












(A)A covered swap entity, or




38





to Article 50(2);







(2)(iii); or



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III


For the reasons set forth in the Supplementary Information section, the Federal

Deposit Insurance Corporation amends 12 CFR Chapter III as follows:

Part 349—DERIVATIVES, Subpart A

5. The authority citation for subpart A of part 349 continues to read as follows:

Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), and 12 U.S.C. 1818 and 12

U.S.C. 1819(a)(Tenth), 12 U.S.C.1813(q), 1818, 1819, and 3108.


39



* * * * *






of this part if changes are made to the non-cleared swap or non-cleared security-based

swap it as follows:

(1) [RESERVED]



(i) The swap was originally entered into, booked at, or otherwise held at, an entity

located in the United Kingdom before the relevant compliance date established in

paragraph (e) of this section and one party to the swap booked it at, or otherwise held it

at, an entity (including a branch or other authorized form of establishment) located in the

United Kingdom;







40


(B) B covered swap entity’s counterparty to the swap, and the counterparty


compliance with the requirements of paragraph (h)(2)(i)-(ii);subject to the following

conditions:

(iii) The law of the European Union ceases to apply [to] the United Kingdom



to Article 50(2);


calculation methods, the maturity date, or the notional amount of the swap or non-cleared

swap;



(vi) The amendments cause the transfer to take effect by the later of:


(2)(iii); or



FARM CREDIT ADMINISTRATION


For the reasons set forth in the preamble, the Farm Credit Administration amends chapter VI of title 12, Code of Federal Regulations, as follows:

PART 624 –MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES


41


Authority: 7 U.S.C 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 2154, 12 U.S.C. 2243, 12 U.S.C. 2252, 12 U.S.C. 2279bb-1.



* * * * *







(1) [RESERVED]

(2) The non-cleared swap or non-cleared security-based swap was amended

under the following conditions:











42








to Article 50(2);







(2)(iii); or



FEDERAL HOUSING FINANCE AGENCY


For the reasons set forth in the preamble, the Federal Housing Finance Agency

amends chapter XII of title 12, Code of Federal Regulations, as follows:

PART 1221 –MARGIN AND CAPITAL REQUIREMENTS FOR COVERED

SWAP ENTITIES


43


Authority: 7 U.S.C. 6s(e), 15 U.S.C. 78o-10(e), 12 U.S.C. 4513, and 12 U.S.C.

4526(a).


§ 1221.1 Authority, purpose, scope, exemptions, and compliance dates.

(AMENDED)

* * * * *

(h) Legacy swaps . Covered swaps entities are required to comply with the






(1) [RESERVED]










44



paragraph (h)(2)(iii) of this section, and the transferee is:

(A)A covered swap entity, or



compliance with the requirements of paragraphs (h)(2)(i) through(ii) of this section;




to Article 50(2);




event described in paragraph (h)(2)(iii) of this section transpires; and

(vi) The amendments cause the transfer to take effect by the later of:


(2)(iii) of this section; or



45


46


THIS SIGNATURE PAGE RELATES TO THE JOINT AGENCY INTERIM

FINAL RULE TITLED “MARGIN AND CAPITAL REQUIREMENTS FOR

COVERED SWAP ENTITIES”.

Dated: March [__], 2019

______________________________

Joseph M. Otting,Comptroller of the Currency.

47





By order of the Board of Governors of the Federal Reserve System, March [__], 2019.

Ann E. Misback,Secretary of the Board.

48





Dated at Washington, DC, on [date__], 2019.

By order of the Board of Directors.

Federal Deposit Insurance Corporation.

____________________________Robert E. Feldman, Executive Secretary.

49





By order of the Board of the Farm Credit Administration.

Dated at McLean, VA, this [___] day of March 2019

____________________________

Dale L. Aultman,Secretary.

50





Dated: 03/xx/2019.

Joseph M. Otting,Acting Director, Federal Housing Finance Agency.

51

Documents

Farm Credit Administration - MARGIN AND CAPITAL ... Register... · Web viewOn or after March 1, 2017, all covered swap entities were required to comply with the variation margin requirements